Monday, 18 July 2011

A nuclear bomb has just exploded in the online auction world that could possibly change the business model adopted by eBay and other Online Auction Intermediaries (AOI) forever. On the 12th July 2011, the Court of Justice of the European Union published its decision concerning the case opposing L’Oreal to eBay (CJEU Case C-324/09).

The liability of eBay has been tested in many European and US courts and until now, the received wisdom was that while eBay could do more to protect IP owners and consumers and eradicate the sale of fake goods on its sites, the law (i.e. the Electronic Commerce Directive 2000/31) was simply not forcing them to do so. This decision from the CJEU is now likely to change all this. The position taken by the court follows in the footsteps of the Google decision (Joined cases C-236/08 and C-238/08) and is unequivocally for a restrictive interpretation of article 14 of the Electronic Commerce Directive, the provision limiting the liability of intermediaries hosting third party content. The Court also clearly sides in favour of Intellectual Property Rights owners, by allowing the use of article 11 of the Enforcement Directive 2004/48 to prevent future infringements of IP right via online auction sales (albeit with some restrictions as we will see below). This may be marking the end of AOI liability as we thought we knew it. This decision is also likely to have an effect on other types of ISPs. It is expected that following the decision of the CJEU, eBay and other competitors will have to shape up and tighten controls on their sites or face many unpleasant consequences.

The decision may be good news for consumers throughout Europe, since tighter controls may mean better piece of mind while buying items on the online auction giant's website. But it also may have unwanted consequences, such as driving costs up and forcing higher commissions being charged, ultimately disturbing the business model that had seen millions flock to the site in search of a bargain. We will for now abandon discussions on the economic impact of the decision to concentrate on the content of the CJEU decision and what is likely to change for ISPs and more particularly Online Auction Intermediaries, since while eBay dominates the market place, it is not the only online auction provider to be affected by the decision.

The referred questions
The decision concerned a number of questions referred to the CJEU by the High Court of England and Wales in the case opposing L'Oreal to eBay. The referral questions concerned the interpretation of:
- Articles 5 and 7 of the Trade Mark Directive and articles 9 and 13 of the Community Trade Mark Regulation on the rights conferred by a trade mark and their exhaustion;
- Article 14 of the Electronic Commerce Directive (ECD thereafter) on the liability of hosts;
- Article 11 of the Enforcement of Intellectual Property Right Directive (EIPRD thereafter) on the ability of national courts to grant injunctions against intermediaries.
The decision is thorny and raises many issues we do not yet feel we had enough time to digest. (We plan to publish a fully fledged commentary soon!) But here is our short reaction to the reading of the decision concerning the questions on article 14 ECD and article 11 EIPRD (namely prejudicial questions 9 and 10 ), leaving to intellectual property experts to react more fully on the intellectual property issues raised by the case, namely:
- The commercialisation on eBay of dramming bottles when those are not normally intended for sale to consumers;
- The possibility for the trade mark owner to oppose further commercialisation of cosmetics products without their original packaging;
- The use of trademarks in the purchase of keywords on search engines to advertise the services of the online auction platform;
- The possibility for trademarks owners to oppose the commercialisation of products not put on the market in the EEA in cases where the advert for such products can be deemed to be targeted at consumers in the territory of the Community.

The Decision of the ECJ on article 14 ECD and the liability of intermediariesOn this point, the CJEU decided the following:

"Article 14(1) of Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (‘Directive on electronic commerce’) must be interpreted as applying to the operator of an online marketplace where that operator has not played an active role allowing it to have knowledge or control of the data stored.

The operator plays such a role when it provides assistance which entails, in particular, optimising the presentation of the offers for sale in question or promoting them.

Where the operator of the online marketplace has not played an active role within the meaning of the preceding paragraph and the service provided falls, as a consequence, within the scope of Article 14(1) of Directive 2000/31, the operator none the less cannot, in a case which may result in an order to pay damages, rely on the exemption from liability provided for in that provision if it was aware of facts or circumstances on the basis of which a diligent economic operator should have realised that the offers for sale in question were unlawful and, in the event of it being so aware, failed to act expeditiously in accordance with Article 14(1)(b) of Directive 2000/31."What this means in my view is that the CJEU rejected the proposition made by Advocate General Jääskinen to disregard the “Neutrality Test” adopted in Google for a more adequate standard. Instead the Court focussed on the "active role" (as opposed to neutral role) the intermediary plays and placed a low threshold of involvement to trigger liability. Indeed the court mentions assistance in optimising the presentation of adverts and promotion as an active role. This may mean that any web 2.0 operator is now at risk of being seen as active because they all provide some form of assistance in shaping content and promote the site (including its illegal uses as well as legitimate ones). Note however that the CJEU left it to the national court to make the determination on eBay's role, i.e. determining if eBay plays an active or a passive role.

Should the High Court of England and Wales conclude that the role is passive, then eBay will only avoid liability if it reacts promptly to acquiring knowledge about the illegal content or activities.
Here the CJEU seem to raise the bar for claims concerning damages. It is not “actual knowledge” that can trigger liability in those cases. It will be sufficient to be aware of or circumstances on the basis of which a diligent economic operator should have realised that the offers were unlawful. However, the reading of the analysis of the Court is rather confusing.

Indeed, the Court gives an indicative list of situations that would be covered, including uncovering the activity on its own initiative and being notified of the existence of the activity or information by a third party. The question then turns on whether or not a diligent operator will seek out illegal activity on its own accord or only rely on notifications. Turning to notifications, the CJEU explains that as a general rule a notification is a factor to take into account in determining, in the light of the information so transmitted to the operator, whether the latter was actually aware of facts or circumstances on the basis of which a diligent economic operator should have identified the illegality. The CJEU acknowledges that it cannot be a presumption as there can be situations where the notification turns out to be insufficiently precise or inadequately substantiated. So, a notification may therefore be needed and will have two main characteristics:
- be sufficiently precise and
- be adequately substantiated.
If this is the case, then ignoring it will result in the economic operator being branded “not diligent” and thus not benefiting from the exemption of liability. But it is unclear what can be branded as sufficiently precise or adequately substantiated and the court does not provide details in this area. (i.e. in this case, would the letter L’Oreal sent to eBay pass this test, or can only precise notices and take down procedures under the Vero programme be relied on?)

In our view the test to escape liability for not only IP rights infringements, but any other illegal activity as an intermediary has become significantly more onerous than it may have thought to have been in the past because two new factors to consider have come to the fore in this decision: neutrality (active role) and the notion of a diligent economic operator.
Further, it is now confirmed that injunctions to prevent further future IP infringements can be granted, increasing again the burden on online auction intermediaries to police their websites.

The Decision of the ECJ on article 11 EIPRD and the granting of injunctions to prevent future IP infringements

The CJEU decided on this point:

“The third sentence of Article 11 of Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights must be interpreted as requiring the Member States to ensure that the national courts with jurisdiction in relation to the protection of intellectual property rights are able to order the operator of an online marketplace to take measures which contribute, not only to bringing to an end infringements of those rights by users of that marketplace, but also to preventing further infringements of that kind. Those injunctions must be effective, proportionate, and dissuasive and must not create barriers to legitimate trade.”
What this means is the injunctions can be granted against online auction intermediary to put a stop to infringements as well as prevent their continuation in future. In effect member States must ensure that such procedures are available to their national courts. Such system was already being used in Germany where in a number of cases against eBay the court imposed an obligation to filter sales to avoid further infringements (see the trilogy of Internet Auction cases: I- Cases I ZR 04/01 [2005] ETMR 25, II- I ZR35/04 [2007] ETMR 70 and III- I ZR 73/05).

The main issue is of course to be able to define the contours of such injunction aimed at preventing the continuation of an infringement of intellectual property right. Those will be carved out of national law.

The CJEU did briefly discuss the potential overlap and contradiction with article 15 ECD which prohibits a general obligation to monitor site activities. It seems here that those injunctions cannot lead to imposing measures that require “active monitoring of all the data of each of its customers in order to prevent any future infringement”. Any general monitoring would also be contrary Directive 2004/48 itself, since all measures must be fair, proportionate and not excessively costly. In addition, the measure must not create barriers to legitimate trade. As a result, an IP owner could not hope for a blanket injunction banning the sale of its product on the site outright, but could seek that the website is asked to monitor similar sales made by the same seller or for a seller account to be closed in order to prevent the same seller, to further infringe rights in respect of the same trademark. Furthermore the court explained that to prevent future infringements, online auction sites may be ordered to take measures to make it easier to identify IP infringers.

Conclusion

Now that the bomb has exploded in the online auction world, it will take months for the ripples of the explosion to reach all shores. In the UK, the High Court, now need, armed with the answers to its preliminary questions, to decide on the facts of the case and render its judgement. Whether it follows the CJEU’s view closely is very likely but not certain. We have already seen in the UK, in the case of Arsenal, how judges could ignore CJEU’s guidance.
However, the only certainty at this point is that this decision does mark the end of ISP’s liability as we knew it. From now on, much of the intricacies of article 14 that had remained unexplained until now (starting with Google) have started to take shape. It appears that electronic commerce has entered a new phase, one where intermediaries, whose activities were at first encouraged by the existence of an exemption of liability, have now to behave much more responsibly in the web 2.0 towards third parties’ activities on their sites.

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